WHY AM I NOT CONSIDERED TOBE”UPSIDE DOWN” IF MY HOUSE IS WORTH LESS THAN MY FIRST MORTGAGE LOAN AND EQUITY LINE OF CREDIT?

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WHY AM I NOT CONSIDERED TOBE”UPSIDE DOWN” IF MY HOUSE IS WORTH LESS THAN MY FIRST MORTGAGE LOAN AND EQUITY LINE OF CREDIT?

House is worth 190K Bbut first mortgage and HELOC combined equal $246k. I have a equity line of credit (LOC) in the amount of 138K secured against my home. I stopped paying for the equity line while I tried to avoid foreclosure on my first mortgage. Got a letter from an attorney representing the LOC creditor asking for 159K or else they will foreclose. I consulted with a bankruptcy attorney who said that the LOC creditor may foreclose because I have 82K in equity (190K home value – 108K HAMP loan), but I can’t file bankruptcy because I am not upside down? Why isn’t the LOC considered as part of the total owed on the home since it’s secured against the 1st mortgage?

Asked on September 27, 2010 under Bankruptcy Law, Florida

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 11 years ago | Contributor

1) You can file bankruptcy regardless of whether you're upside down on a home or not; bankruptcy is NOT limited to those who are underwater on a home loan. Maybe the attorney meant he felt you shouldn't, based on his judgment and experience file, or that it wouldn't help you much--but you could file if you like.

2) Bankruptcy temporily stays, or delays, foreclosure, but does NOT prevent it. If someone, like a mortgage lender, has a security interest in property, he, she, or it can still foreclose unless you continue paying the secured loan even after bankruptcy. There are some nuances to that, but that's the basic rule.

3) In practical terms, from your perspective, you're underwater; from the 1st mortgage lender's perspective you're not, since as long as there's positive equity compared to the 1st mortgage, if they foreclose, they'll get something (the positive equity)--the first loan must be  paid in full before second mortgage or home equity is paid at all.

You may wish to consult with a different attorney--at a minimum, it seems as if you and this one are not communicating in an effective way.


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